Thursday, September 01, 2005

The Future of New Orleans

In the year 2010, what will be New Orleans' population and employment count? What share of the population will be living in poverty? Will this poverty share increase because the middle class and rich will leave and this lowers real estate prices which act as a poverty magnet? An optimist could point to New York City today. The 9/11 attacks have not dampened that city's real estate boom or its ability to attract the best and brightest. But what about New Orleans?

What is this city's comparative advantage? I see a tourist destination. But, tourists will not be visiting this city for years. Today's New York Times business page says that New Orleans is a major hub supplying energy products around the nation and it serves as a transportation center handling farm products and other commodities delivered on the Mississippi River and by railroad.

The city does have fixed infrastructure such as Tulane University. Such research universities help to anchor some human capital to stay in the region. But as I think about the transition in the short run and medium run, will anyone who has a choice over where to live (such as an academic economist) really want to stay there?

Given the low quality of life that could be expected to persist for 10 years, how much of a brain drain will now take place?

Consider the housing market for the highly educated in New Orleans. I'm assuming that folks who owned a $400,000 house had hurricane insurance and get a big check back. Will these folks rebuild in New Orleans or move elsewhere? An interesting game of expectations ensues. If the upper middle class think that other upper middle class
households are moving away, then this will increase the likelihood that they move away. The politicians of this area need to think about how to lure this mobile
group to stay in the area.

I just told my wife about this post and she pointed out that households with big mortgages that they owe a bank will not be able to leave even if they wanted to. This "lock in" effect could help New Orleans keep some of their middle class. What will be the re-sale value of homes and land in New Orleans? New Orleans home prices will fall sharply as outsiders fear future hurricanes and do not want to live in such a depressing rebuilding area. (here I'm not even mentioning the humidity)

My point is that if people are mobile and if they care about quality of life and if New Orleans' quality of life will be awful for a long time, then this city could experience another shock of losing its human capital. A long line of urban economics research has argued that human capital is the key to urban growth. If New Orleans suffers such a brain drain, then hurricane Katrina will have an even longer impact.